Different types of economic systems


What Is an Economic System?

  • Economic systems are the methods societies and governments use to organize, allocate and distribute goods, services and resources across locations.
  • It serves as a regulatory system for controlling different aspects of production and distribution, including capital, labour, land and other physical resources.

Types of Economic Systems

  • Each type of economic system has its own distinguishing characteristics, although they all share some basic features.
  • Each economy functions based on a unique set of conditions and assumptions.


The main categories are as follows:

  1. Traditional economic system
    • This is based on goods, services, and work, all of which follow certain established trends.
    • It relies a lot on people, and there is very little division of labour or specialization.
    • In essence, the traditional economy is very basic and the most ancient of the four types.
    • It is commonly found in rural settings in second and third world nations, where economic activities are predominantly farming or other traditional income-generating activities.
    • Advantages
      • Rarely any surplus in goods or resources
      • Community members are generally more satisfied in social roles
      • Absence of total economic hierarchy results in a lack of economic competition
    • Drawbacks
      • Antiquated methods of distribution
      • Lack of growth and technology development
      • Reliance on localized resources and services inhibits globalization
      • Less focus on industrialized production and more focus on agricultural processes


  1. Command economic system
    • In command economic systems, governments and centralized powers control much of the economic processes, including allocating and distributing resources, goods and services.
    • Many command economies consist of governments that have total control over the distribution and use of valuable resources, like oil and gas.
    • Additionally, these types of systems may operate under governing entities that have ownership of essential industries like transportation, utilities and energy, and technology.
    • Advantages
      • Creates potential for mass mobilization of necessary resources due to government control
      • Creates additional jobs for community members and citizens due to increased mobility of resources
      • Focuses on benefits to society over individual interests
      • Encourages more efficient use of valuable resources
    • Disadvantages
      • Creates scarcity due to an inability to plan for individual needs
      • Forces government rationing due to inability to calculate demand on set prices
      • Eliminates market competition, resulting in a lack of innovation and advancement
      • Inhibits employees’ freedom to pursue creative jobs and careers


  1. Centrally planned economic system
    • In this, the society creates and dictates economic plans to drive the production, investments and allocation of goods, services and resources.
    • The government only intervenes in production processes to regulate fair trade agreements and ensure compliance with international policy.
    • Additionally, governments in a centrally planned economy take part in coordination efforts to provide public services.
    • Advantages
      • Better able to meet national and social objectives by addressing issues like environmentalism and anti-corruption
      • Gives governing powers the ability to make decisions regarding the production and distribution of goods and resources when private industries cannot raise enough investment capital
      • Allows input from community members on government plans for setting product prices, determining production quantity and opening up job sectors
    • Disadvantages
      • Can create a lack of government resources to respond efficiently to shortages and surpluses
      • Potential for corrupt actions within governing bodies and established powers
      • Creates a potential loss of freedom for citizens wanting to start their own enterprises
      • Institutes governing powers that sometimes develop into repressive political systems


  1. Market economic system
    • In a market economic system, or a “free-market system”, communities, firms and proprietors act in self-interest to decide how to allocate and distribute resources, what to produce and who to sell to.
    • Governments in market systems typically have little intervention in how businesses operate and generate income, however, can regulate factors like fair trade, policy development and honest business operations.
    • Advantages
      • Provides incentive for innovative entrepreneurship
      • Gives consumers a choice in goods, services and purchase prices
      • Creates market competition for resources, resulting in quality offerings and efficient use of resources to produce goods
      • Inspires research, development and advances in goods and production of goods
    • Disadvantages
      • Highly competitive markets can cause a scarcity in resources for disadvantaged individuals
      • Potential for monopolizing of industries and niches, such as technology, health care and pharmaceuticals
      • Can increase income disparity by placing focus on economic needs over societal, community and human needs


  1. Mixed economic system
    • Mixed economic systems combine two or more economic practices to form one central system.
    • Traditionally, a mixed economy consists of a market and command economy combined to form an economic system where the market is generally free from government or national ownership.
    • However, the government can still have control over essential industries and sectors like transportation and defence
    • Further, the governing entities in mixed economic systems usually have a predominant oversight over the regulation of private corporations and businesses.
    • Advantages
      • Allows for private companies to operate more efficiently and reduce operational costs because of less government oversight
      • Creates an outlet for market failures through allowing certain government intervention
      • Enables governments to create net programs like social security, health care and food and nutrition programs
      • Gives governments power to redistribute income through tax policies, reducing income disparities
    • Disadvantages
      • Government intervention can be too frequent or not frequent enough, creating an imbalance
      • Creates potential for government subsidiaries within state-run industries
      • Can cause subsidized government industries to go into debt with a lack of competition in state-run industries